Financial markets

House prices

What goes up did not come down

THE most lively controversy in the British economy at the moment is whether the country is slipping back into its old habits; in particular, dependency on a debt-fuelled property boom.

In a splendid piece of research last week, Fathom Consulting pointed out that

The real estate sector accounts for almost of quarter of all the jobs created in the UK over the year to June. The rise in real estate employment in the latest quarter is the strongest on record. Over the past year the number of real estate jobs has risen by 77,000, the number of construction jobs is 1,000 higher, manufacturing is 14,000 lower. The number of real estate jobs is now at a record high – 100,000 more than at the peak of the boom in the summer of 2008. The number of construction jobs is more than 300,000 lower than its peak.

Anyone who wanders down a British high street will agree with Fathom's contention that instead of being a nation of shopkeepers, Britain has become a nation of estate agents.

Whose fault is this? Some, including Albert Edwards of SocGen blame the government for its "help to buy" scheme. In a polemical piece, Mr Edwards issues

a word of warning to George Osborne. If he presses on with phase II of "help to buy" and the UK does suffer its inevitable bust, history may judge him even more harshly than Alan Greenspan

The outright pace of house price rises is not that rapid. Figures from the ONS show average prices up 3.3% over the 12 months to July, and that was largely driven by London, where prices were up 9.7%. Prices fell in both Scotland and Wales. However, given the importance of the capital (which comprises well over 10% of the country's population), dismissing London as a "one-off" is not sufficient. Yes, prices in the centre of London have been driven up by wealthy foreigners but this has a knock-on effect in the rest of the capital; it cannot be efficient for an economy if ordinary workers struggle to afford decent housing in the biggest city.

And Mr Edwards is right to point out that the striking thing about UK house prices is that the pre-2007 bubble never fully popped. Take a look at the graph.

In relation to earnings, London house prices are almost as expensive for first-time buyers as at the peak. And the post-2008 decline looks very mild by previous standards.

Why didn't the bubble burst? Look at the numbers on housebuilding. Forty years ago, the country was regularly building more than 300,000 new dwellings a year. Even in 2007-2008, nearly 220,000 homes were constructed. But the 2011 number was just under 146,000.

Compare that with the change in population. The table below compares the two for the last four census periods

Rise in population Homes built

1971-1981 500,000 2,922,850

1981-1991 1,000,000 2,128,960

1991-2001 1,700,000 1,864,380

2001-2011 3,500,000 1,875,350

Broadly speaking, in the 1970s, housebuilding outpaced population growth sixfold; over the last decade, only half as many homes were built as people added. With demand outstripping supply by such a large amount, the priority seems clear. Build more houses; build more flats.

To be fair, that would seem to be the aim of the government's help-to-buy scheme which has two phases, one which encourages first-time buyers by lending them a large part of their deposit; and the second, which will guarantee loans. It is the second part that gets the likes of Mr Edwards worked up, on the understandable grounds that it looks like a British version of Fannie Mae and Freddie Mac. Our leader described it as a "daft new government subsidy scheme". As Fathom points out above, so far the main effect has been to create jobs in estate agency, not construction.

Rather than help first-time-buyers to afford inflated prices, the best approach would be to drive prices down by a housebuilding programme. The government did talk about loosening planning laws when it first came to office but ran into opposition from the NIMBYs among its backbenchers. But it would also be worth, in this blogger's view, initiating a government housebuilding plan; just the kind of infrastructure spending that will have the best chance of stimulating the economy.

UPDATE: Sorry to add to an already long post, but two other factors need mentioning. Since a collapse in house prices is generally seen as an economic catastrophe, monetary policy tends to be geared to the condition of the housing market. Record low interest rates have played a big part in keeping house prices from falling further, and ther potential impact on the housing market may affect the timetable for returning policy to normal. But which part of the population is best served by high house prices? Not the young who are condemed to living with their parents into their 30s or cramming themselves into shared accommodation. The middle-aged and the old benefit, and they have already landed the young with the bill for their pensions.

Readers' comments

I just don't get it. In the past 40 years the population has increased by 6.7 million while about 9 million new homes have been built. Assuming that each home contains, on average, 2 people that means that 3.35 million new homes were needed. For any housing shortage to get worse over the period, over 4.65 million homes would have had to be demolished. Is this realistic? Otherwise, something else must be driving prices higher. But what?

Planning reform and relaxation/ partial-abolition of the green belt are the only sane answers.

Indeed, allowing London to grow well is the UK's easiest route to robust economic growth.

Invest in new commuter rail routes outwards, and release land, stipulating adequately high housing densities for new construction (e.g. require all buildings to be in the 5+ stories range within a kilometre radius of the new tube & train stations). Plenty of cycle paths & bike storage at the new tube/train stations too please. Pragmatism is needed if we want a higher general quality of life.

In a nod to Cornish Expat below, this is really interesting stuff.
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My guess is that in winner-take-all global markets, where wealthy folks can live nearly anywhere, London has a lot of positives. So, why not have a house in London, maybe one in Dubai, perhaps a flat in Singapore, another in Sydney, one in the States...

Shaun39 is quite right; household formation is the key. According to the ONS, there were 25.5 million households in Great Britain in 2011, an increase of 9.2 million since 1961 and 1.6 million since 2001.
Average household size in Great Britain has decreased from 3.1 persons in 1961 to 2.4 persons
in 2011.

Reduced average household size is actually the dominant factor at play. Fertility rates have collapsed, single parenthood is far more common today than ever before, and almost half of all adults in the UK live alone today (whereas back in the '70s that was extremely rare).

Population growth mattered. But it's even more important that:
1) that population number includes far fewer children and
2) each member of that population is far more likely to live alone (or with more floor space per capita)

Drives prices through the roof. That said, there has also been massive population growth in London, through both internal UK migration and international immigration.

The stark fact is that low rates and QE are good for debtors and bad for savers. Young people are debtors and older people are savers. And as someone who (just about) finds himself on the young side of the fence, let me tell you that I'm all for it...

Youngsters don't tend to realize that printing is causing lofty prices in tuition, housing, etc... They just know they can't afford things, but don't know that wanton printing is the reason why. Each dollar the bank prints takes some of the purchasing power away from the dollars in their wallets.

Potential explanations for the anomaly described above:
1. Internal migration within Britain, in which case prices should have been falling in some deprived areas;
2. Replacement of the prefabs and other cheap housing thrown up after the war to replace the effects of German bombing;
3. Replacement of vertical slums thrown up in the 60s;
4. Reduced average household size;
5. As Dialect18 suggests above, increased numbers of second homes, both by Brits and foreigners (but is this effect greater than that of Brits establishing first or second homes in Europe and elsewhere);
6. Some combination of the above.
Any others? And how do they combine?

I've been thinking lately that this kind of employment is a marker of post-industrial reality: what the heck else are they going to do for work when industry has largely moved on?

I like watching HGTV, which is all about house buying and renovation. I wonder about this in the context of expectations. Not that long ago, we were satisfied with much less and we bought places and lived in them as they were. Expectations speak of a view of the future, so this could be a sign of future prosperity. Yet I wonder if these broad expectations reflect the numbers of people involved in the housing industry, in renovation, etc. so the lack of industrial employment translates into employment that feeds expectations ... which connect to those who do relatively well in a post-industrial world and that generates expectations. I guess you could say this employment has hitched itself to that which is available, meaning the spillover of jobs in the post-industrial services economy. Good or bad? Beats me.

"...it cannot be efficient for an economy if ordinary workers struggle to afford decent housing in the biggest city." - Yet that is exactly why a non-establishment leftie is now the Democratic nominee for mayor of New York City! It may not be efficient, but it sadly happens to be true. Check out the eye-watering estate listings for NYC; even the 'outer boroughs' are absurdly priced.